Lord Fowler: My Lords, the Minister has said that it is against the Government's policy to increase the state pension age. Does that constitute a complete ban from now onwards or, if the Turner Pensions Commission proposes that, will they reject it?

Baroness Hollis of Heigham: My Lords, I am not going to anticipate how any government, including, possibly one formed by the noble Lord's own party in the future, may wish to deal with the matter. However, I want to explain why we believe that the measure we are discussing is unfair at this point in time.

Between 1972 and 1976 the life expectancy gap between the professional classes and unskilled manual workers was 5½ years. Now that same gap is 7½ years. It has widened, not narrowed. Obviously, both groups live longer, but the professional classes have pulled ahead of manual workers. I am told that the average life expectancy in Glasgow is 67 although I cannot confirm that. Therefore, any raising of the state pension age which is not accompanied by a reduction in health and age inequalities falls deeply unfairly on those who are poorest and who have had less opportunity to enjoy their retirement. I would love to see those inequalities narrow, and in those circumstances I can well conceive that that question might be reopened. However, that is not where we are now and at the moment health inequalities have widened since the 1970s, not reduced. That is why we say what we are saying.

However, having said that, our recently announced changes to the rules on deferring state pension will provide solid financial incentivesin other words, carrots rather than sticksfor people to work beyond the state pension age. I believe that the noble Lord, Lord Goodhart, mentioned that. Providing a generous

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lump sum worth up to £40,000the size of the average DC pot, incidentallyor, alternatively, generous increments will, I believe and hope, encourage people to work longer. Other proposals contained in the Bill concern being able to accompany your pension with reduced working hours and so on.

The noble Baroness, Lady Greengross, pressed me on the implications of the introduction of the EU directive on equal treatment, as did my noble friend Lady Royall. We are setting in place a legislative framework which ensures that people cannot be barred from employment on the basis of age. I believe that your Lordships acknowledged that in your report. However, it was left to my trade union friends again to see the issue to some degree from the point of view of employers. I understand that business has concernsI hope that it is wrong about thatthat to move towards scrapping a mandatory employment retirement age altogether would require them to introduce competency based systems to avoid reference to employment tribunals. I understand that evidence from southern Ireland shows that something like 20 per cent of all references to employment tribunals are age-related discrimination cases. It is that concern of employers, which I hope will prove ill founded, that we have to work to overcome. Certainly, flagship companies such as Marks & Spencer, which have abolished their mandatory retirement age, let alone the B&Qs of this world, show us just how rich a contribution older workers can make to the workforce. Indeed, interestingly, they are far less likely to throw "sickies" than younger workers, although when older workers become sick they are likely to stay off work for slightly longer, perhaps by virtue of the seriousness of their ill health.

The Pensions Commission said also that many people need to save, and we agree. Significant numbers of people are not financially prepared for their retirement. We are seeking to encourage them to be preparedthe noble Baroness, Lady O'Cathain, pressed me on this. We shall provide pension forecasting and information. We hope to see greater emphasis on financial information in the citizenship modules in school curriculums. The Secretary of State has made an announcement on financing trade union advisers. The pilot schemes with financial service advisers and the CAB are working well. We explored all those avenues at great length in the Pensions Bill to promote informed choice and to encourage people to acquire greater financial literacy. The noble Baroness is right. One cannot overstate how ill-informed most people are about their financial circumstances. The statistics quoted by the noble Baroness, Lady Sharp, were very relevant to that. We are seeking to address those issues, though we have a long way to go.

We are seeking also to strengthen protection in the Pensions Bill through the Pension Protection Fund and the Financial Assistance Scheme. We need to educate people into realising "the glories of compound interest" as I think the noble Baroness put it. I shall pick up on that idea. Even very modest savings, continued during a full lifetime, are very worth while.

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I think I have the time to explore this for a moment. Let us take the example of someone who has earnings of £16,000 a year. If we accept the very modest assumptions of a 2 per cent growth in real earnings and a 4 per cent growth in investment earnings, someone who is earning £16,000 a year now, contributing 6 per cent of his income, or something like £14 a week net, matched by his employer and with everything else coming in, would retire in cash terms with a replacement pension of 72 per cent or £500 a week, in today's money. It is rolled up; it is the effect of compound interest. I hope on the basis of everything that has been said today that people do not think that even modest sums£50 a month, let alone £100 a month, over time and paid regularlydo not roll up to something very useful and very substantial indeed.

We hope to encourage people to accept that it is worth their saving. We hope to encourage people to work longer so that they have longer to save. We hope to encourage employers to work with us to keep people in the labour market. We hope to reduce health inequalities so that people are able to do so.

As many of your Lordships have said, it is not a single strategy, but it is incrementalism across a wide range of fronts. That is the only way, and the right and decent way, to go forward.

I shall conclude. We are taking the challenges that longevity brings to the UK. We are extremely grateful for the report of my noble friend Lord Peston and other noble Lords. The Adair Turner commission has built on that. We are waiting for its final report. None of us disputes its analysis. We have a long way to go to build consensus on the way forward, but that we seek to do it byif I may use that clumsy phrasecarrots rather than sticks I am sure at this stage is right.

However, I hope that if, together, we can increase financial literacy; if, together, we can ensure that employers recognise the richness that older people bring into the labour market; if, together, we can stop people dropping out of the labour market before they are 65, as they are currently doing, let alone working past 65; if, together, we can address the particular problem of women's structural inequality in the labour market and therefore in pensions provision, I hope that we can all look forward, not just for ourselves, but for our fellow citizens, to a comfortable as well as healthy old age.

Lord Peston: My Lords, in bringing this interesting debate to a conclusion, I must rectify one omission from my opening remarks; namely, that I forgot to thank our clerks and our adviser, Professor Paul Johnston, for their contribution. Without them, there would have been no report. I forgot alsothe noble Baroness, Lady O'Cathain, will say that it is typical of meto thank the members of the committee. That is particularly remiss of me because, even sitting here and looking over the recommendations, I am struck by how many of the important ones came from members of the committee. The problem was to persuade me to think it through rather than to persuade the committee. This is very much the report of the committee. I thank them for that.

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I believe that the Minister should have the last word. However, I have two substantive economic points to make. One is that it seems obvious that if GDP continues to grow at its present rate, if productive employment life increases pari passu with life expectancy, it must be the case that were the state pension to be index-linked by earnings, the ratio of the cost of the state pension to GDP would be constant. Therefore, it is completely beyond me where my noble friend gets the extra burden from.

I now turn, nastily, to my three noble friends. I must tell them that if GDP growth ceases, and if productive working life does not increase whereas life expectancy does increase, of course we would have a crisis and older people would have to get used to much lower incomes than would otherwise be the case. Perhaps I may make two comments on that. One is that that applies to any method of financing retirement, whether it is tax-based, savings-based, or a combination of the two. But I must ask my three noble friends why they would make such economically nonsensical assumptions to arrive at their conclusions. The assumptions made by the committee are very much more in line with what both economics and history say.

I have one last remark which the noble Lord, Lord Fowler, can talk to me about later. He favoured compulsion to facilitate savings. I thought that that was an excellent point, which I am rather sorry I had not thought of myself. He did not advocate compulsory savings; he said that we must compulsorily facilitate savings. In that regard, and this is positively my final remark, he is entirely right.